Investors looking for yield in their portfolios haven’t had it easy in recent years. For many, low yields on every type of asset have made building an income-generating portfolio more difficult than ever. Investors in many European bonds are even receiving negative yields, which is to say that they are paying to lend. As Anchalee Worrachate reports for Bloomberg, that’s financial vandalism. She writes:
A once-unthinkable collapse in global bond yields is forcing pension funds to buy bonds that offer negative returns — putting the financial security of future retirees in jeopardy.
U.S. institutions managing trillions of dollars in retirement savings — including the California Public Employees’ Retirement System — have been ratcheting down return expectations. Japan’s Government Pension Investment Fund, the world’s largest, has warned that money managers risk losses across asset classes. In Europe, pension funds may be forced to cut benefits in part thanks to the decline in rates.
Investors were already taking on more credit risk to make up for dwindling income elsewhere, with some chasing less liquid markets like private debt. Now, negative yields on over a quarter of investment-grade bonds — with more monetary easing to come — are increasing the urgency for portfolio managers to find new sources of returns.
“The true madness is pension funds being forced to invest in assets which will be guaranteed to lose, such as in the case of long dated inflation-linked gilts at real yields of -3%,” said Mark Dowding, chief investment officer at BlueBay Asset Management, which has pension-fund mandates. “It is financial vandalism and the government and central banks need to wake up to this.”
Pension funds invest in a variety of assets, but most including defined-benefit plans use low-risk assets such as government bonds as the benchmark discount rate. While that means they have profited from the fixed-income rally, falling yields have also driven up future liabilities — in turn threatening their ability to meet oncoming obligations.
Worst hit by extremely low and negative yields are pension funds, which as I have written (here, here, here, here, and here) have maintained expected returns much higher than can be supported by today’s low yield environment. For the sake of retirees and savers around the world, this institutionalized financial vandalism cannot be allowed to continue.
Read more here.
E.J. Smith - Your Survival Guy
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